Direct Examination of the
Business Valuation Expert
By Joy M. Feinberg Skillful, seamless direct
examinations are crafted by careful planning and attention to detail. Preparing the direct
examination of a business valuation expert requires even more attention to details than
most other examinations, as well as some knowledge, if possible, of the audience to whom
you are presenting the evidence. How well does the judge comprehend accounting, finance
and valuation principles? Where are the weaknesses in the positions being advanced? Upon
what areas will your opponent focus the attack? All of these factors must be considered by
the attorney when constructing the expert's examination.
When preparing the direct, consider
whether there is any risk associated with your expert's credentials or ability to be
accepted as an expert. Has the expert strayed from his or her field of expertise? Such
examples may be the business appraiser who offers an opinion on compensation issues; the
value of equipment; or even the fair square footage rental rates in a certain community,
any or all of which may be outside of that expert's true field of expertise. If the expert
is demonstrated to be lacking in the specialized knowledge required to formulate such
opinions, you may find your expert's testimony is limited, stricken or excluded.
Consider whether or not the theory of
valuation upon which your expert is basing his or her opinion is generally recognized by
the valuation community as a valid methodology of determining value. If not, your expert
may not survive a Daubert or Free challenge.
Again, if your expert does not use a
generally recognized method, the testimony may never be allowed to occur in the trial.
Such problems should be detected before the report is finalized so that you and your
expert are not caught short at trial. The attorney should also check to see if the
retention agreement comports to the work performed. Did the valuator exceed his or her
authorized work arena by moving from valuator to litigation consultant? Review the
expert's time records and files to see if any notes in those files reveal damaging or
potentially damaging information.
Building a business valuation expert's
direct examination should be accomplished in logical blocks of information, presented with
demonstrative evidence and analogies to assist the judge in understanding the information
being presented. A typical outline of such an examination begins with credentials of the
expert. All experience in the industry of the business being valued should be emphasized.
Move on to the work which the expert did in preparing for the valuation, such as documents
reviewed, sources consulted, any site visit, other expert reports reviewed (such as:
equipment appraiser report; real estate expert report on fair rental rates for
owner-leased premises, etc.) personnel interviewed and the information gleaned from each
such resource, competitors examined, recasting of income and financial statements to
include income not accurately reported or to exclude expenses of personal use, such as a
boat or condominium owned for the personal use of the owner, or nonbusiness meals and
entertainment charged and paid by a corporate credit card; extended family members
receiving perquisites such as gasoline charge cards; home or cellular telephones paid by
the business, repairs to the owner's home being paid by the business, and the like. The
purpose of each of these actions should also be explained.
When representing the business owner who
also acts in the capacity of CEO, be certain to point out all actions the valuator took to
check the veracity of the information being supplied by that individual. This will add to
your expert's credibility.
Have the expert detail the impact of the
economic circumstances of the community, country and world at and around the time of the
valuation, and how this information impacts the valuation. Move on to an explanation of
the particular industry and then to the specific products) or commodity for the entity
being valued. Have him explain any peculiarities of that field or product, such as a
limited life of the product, so that the judge formulates a perception of the depth and
breadth of the expert's knowledge of this specific enterprise.
Once this background of information has
been completed, it is time to move on to the nitty-gritty of valuation. Explain what
generally recognized valuation method is being used and why. Just like we did in law
school, explain what methods were rejected or used as a secondary methodology, along with
the reasoning for each such decision. Itemize all components of the valuation method and
explain how the expert carried out the work required for each such component. Included
within this portion of the testimony should be the financial calculations printed in large
enough print to be read without strain. Provide the judge with a copy to write upon for
each segment of the calculation, such as the capitalization rate calculation; revenue
growth assumptions and projections and the like.
At this point, all discounts must be
explained and calculated, such as risks of size, management, high percentage of income
from 1 source; minority discount; lack of marketability discount and the like. The expert
must explain all sources relied upon in determining the percentages to be attributed to
such discounts and the relative comparison between those sources and the particular entity
being valued.
Finally, the ultimate conclusion of value
or range of value should be presented with the report being accepted into evidence,
subject to cross examination. In order to prepare for any upcoming cross examination, the
opponent's theories or conclusions should be debunked or discounted at each stage of
direct examination. If your expert is also serving to rebut the other expert's report, and
that report has been presented, you will want to address any areas of disagreement not
already covered in each previous block of information presented.
This article has not addressed the
general rules and concerns of direct examination which should always serve as guideposts
to the practitioner. It is the attorney's job to assess the judge's understanding of the
information being presented and to direct the witness to clarify information that does not
appear to have been understood as stated. Keeping this testimony simple, interesting and
comprehensible is a challenge, but not impossible. Careful planning and preparation, as
always, are the cornerstones of success at trial. |
